Microsoft Successful in Windows Copyright Suit in Shanghai

A local court in Shanghai ruled on Thursday that Dazhong Insurance must pay Microsoft 2.17 million yuan ($317,900) as compensation for using pirated Microsoft software, NetEase.com reported.

Court evidence showed that Shanghai-based Dazhong installed and used at least 450 sets of nine pirated Microsoft programs. Microsoft demanded that the defendant to stop the infringement and pay 2.25 million yuan in compensation. (China Daily)

This is not a groundbreaking case, but it is worth pointing out because of the size of the damage award.

First, the case is fairly straightforward, which gives me the opportunity to explain how these things are carried out. What we are talking about here is a copyright infringement case. Software in China is primarily protected by the Copyright Law (not the Patent Law), and so most civil lawsuits of pirated copies of Windows, Office, games, or any other applications, are usually copyright infringement suits.

Here’s how a case usually works:

1. Initial indication of infringement – somehow the information that an infringer is out there gets to Microsoft. Exactly how depends on their in-house setup these days. The information could come in through a retailer, wholesaler (or other distributor), employee of Microsoft, or any other interested third party (like a disgruntled employee of the infringer). Alternatively, the information could have been generated by an investigator, outside counsel, or in-house people who are tasked with IP enforcement.

2. Case development (basics) – the investigation phase could take a lot of twists and turns depending on a lot of factors. The important thing early on is to confirm the infringement activity, specifically identify the infringer (i.e. the corporate entity), and begin collecting evidence.

3. Case development (product purchase) – in most cases, the primary piece of evidence is the infringing product, and the IP owner is dealing with a seller. For Microsoft, they were dealing with an end user, so the important thing to document was the use, not a purchase. In either case, this is done through the Public Notary Office, whereby a notarial officer (one or more) visits the premises in question and documents the infringement. In this case, they would have documented/witnessed the copies of Windows on the PCs of the infringer.

4. Strategic concerns – usually after some investigation has been completed, but sometimes earlier, a decision has to be made whether to go to court, try for criminal action, or take the administrative action route. In this case, Microsoft decided to go for court, most likely because they had a solid infringer as a target with the ability to pay damages (there were undoubtedly other reasons as well).

5. Venue – Shanghai court seems like the only option in this case. The infringer not only was located there, but the infringing activity also took place in Shanghai. In cases where you have a seller as a defendant, a great deal of flexibility is possible in choosing a legal forum.

6. Judgment and appeal – the decision announced today was a first instance decision. The article quoted above, which only says “local court,” isn’t very helpful, but one can assume that the judgment came from an Intermediate Court with jurisdiction over the geographical area in which the infringer resides. If they file an appeal, it would go to the next higher court, the High Court in Shanghai.

7. Enforcement – Assuming no appeal, or if Microsoft wins the appeal, they would then be able to enforce the judgment (if necessary). This would be carried out locally again, in the court with jurisdiction over the area in which the infringer resides.

So those are the basics. This case most likely proceeded, and will continue to proceed, in that general fashion. Lots of different possibilities, of course, and different IP owners approach IP enforcement differently.

The main takeaway from this case, though, is the amount of damages. Copyright is generally a very cheap type of infringement, which over the years has made industry groups like the MPAA and RIAA apoplectic, not to mention their IP owner members.

It seems like damages are continuing to trend upward, though, which is a very good thing. Only when the cost of infringement becomes very high, with the possibility of enforcement likely, will any sort of deterrent effect apply.

In this case, there were nine copies of the software and 450 users. Assuming that the infringement analysis took into account each user copy (and not just the nine initial copies), then you have a total judgment of 2.25 million RMB, divided by 450, giving us RMB 5,000 for each incident of infringement.

If my assumptions, and math, are correct, that’s quite respectable for this kind of copyright infringement case. The total damage award, which of course was related to the number of copies being used by the infringer, is also high enough to fund the litigation expense itself, which is often a key factor for moving forward with an enforcement action in many jurisdictions.

Disclaimer: The above is based on limited information on a case that was just decided. Even without details, I thought it was worth making a series of assumptions so I could discuss some general points. I undoubtedly made some incorrect assumptions about this specific case, so please keep that in mind.

I am not so sure that I can agree with the observation that damages are trending up. There has been an increase in patent damages, particularly in some jurisdictions and for some high proflie cases. However, in copyright, damages remain low and the trend is inconsistent. According to the CIELA database (www.ciela.cn) – if you search for copryight infringement or software copyright infringement), 2007 was generally better than 2008 2009 data is incomplete. There also remain other challenges, besides relatively low damages – such as relatively low incidence of evidence preservation orders, stretched administrative resources, and difficulties in bringing criminal prosecutions to achieve wide spread deterrence.

I was speaking of the long term. Data from any one year is difficult to extrapolate from as other factors might skew the trend in a given year. Also, although the systemic challenges you enumerate are undeniable (i.e., I completely agree), those are separate, although related, issues.

You are right to highlight patent damages as trending higher than others. One would expect that, as one would also expect copyright to lag behind. Things are getting better, over time, but copyright remains a very difficult area.